AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the Rhode Island Clean Water Finance Agency (RICWFA or the agency):
--Approximately $14 million safe drinking water revolving fund revenue bonds, series 2014A (pooled loan issue).
Bond proceeds will be used to fund loans which will be used to finance or refinance portions of the cost of certain drinking water projects within the state and to pay costs of issuance. The bonds are scheduled to price via negotiation on December 4.
In addition, Fitch has affirmed the following rating:
--$158.7 million outstanding parity bonds at 'AAA'.
The Rating Outlook is Stable.
The series 2014A and outstanding parity bonds are secured by loan repayments, reserve account (not funded for the 2014A bonds), reserve account earnings, and scheduled reserve deallocations.
KEY RATING DRIVERS
ROBUST FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
HIGHLY-RATED BORROWER POOL: Approximately 89% of RICWFA's drinking water state revolving fund (DWSRF) loan pool consists of borrowers exhibiting investment-grade ratings. Loan provisions are also strong with the majority of loan principal secured by borrowers' net system revenue pledges.
SIGNIFICANT BORROWER CONCENTRATION: The loan portfolio has a high level of concentration as the pool consists of only 20 borrowers. To account for this, programs with higher concentration are assessed at higher stress levels in Fitch's PSC.
STRONG PROGRAM MANAGEMENT: RICWFA's management team is experienced and maintains sound underwriting and loan monitoring procedures as evidenced by the fact that the trust has never experienced a borrower default.
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are unlikely to occur.
RICWFA issues bonds to provide subsidized financing to governmental entities throughout the state for its drinking water and clean water state revolving fund (SRF) projects. Rhode Island historically used a reserve fund structure commonly seen in other older SRFs. However, beginning in 2009, the agency began transitioning to a cash flow-based model. Under this model, federal capitalization grant moneys are used to fund loans that will overcollateralize debt service instead of solely funding sizable reserve funds that are used to cure loan defaults.
ROBUST FINANCIAL STRUCTURE
Fitch measures financial strength of the DWSRF program by calculating the program's asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments, reserve fund amounts, and account earnings divided by total scheduled bond debt service. The agency's PASR is 1.7x, which is close to Fitch's 2014 median level of 1.8x and is considered to be robust by Fitch. Minimum annual debt service coverage (DSC) is also strong at 1.4x, which falls in line with the 'AAA' median level. Fitch notes that both the PASR and minimum annual DSC have slightly improved over Fitch's previous two rating reviews.
Cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% in any four-year period over the outstanding bonds' expected life (per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This result is in excess of Fitch's 'AAA' liability rating stress hurdle of 27%, as produced by the PSC. The liability rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, loan size and term, and concentration.
HIGH-QUALITY LOAN POOL WITH SIGNIFICANT CONCENTRATION
At just 20 borrowers the DWSRF loan pool is small and highly concentrated. The top three and top 10 borrowers represent approximately 78% and 98% of the aggregate loan pool, respectively. The city of Newport remains the agency's largest borrower, representing 30% of the pool. The next two largest borrowers, water utility system loans to the city of Pawtucket and the Providence Water Supply Board, each represent about 24% of the pool total. Although the three largest entities are unrated by Fitch, each is assessed to be of sound credit quality.
Somewhat mitigating the concentration risk, the loan pool is highly rated, with approximately 89% rated investment-grade. The program's loan security is also favorable, with approximately 97% of loan principal backed by net system revenue pledges and the remaining 3% backed by general obligation pledges.
ENHANCEMENT PROVIDED BY OVERCOLLATERALIZATION AND RESERVES
The series 2014A and certain prior series of bonds are primarily protected from losses by surplus pledged 'direct' loan repayments funded from federal and state grants made in excess of bond debt service (overcollateralization). As bonds enhanced by overcollateralization amortize, excess amounts are available to cover debt service shortfalls for all DWSRF bonds on a parity basis before being released to fund other pledged or non-pledged direct loans.
Other prior series of bonds are protected from losses by reserves or Local Interest Subsidy Trust (or 'LIST' funds) funded initially by federal and state grants. Similar to the surplus revenues described above, reserves are released from the fund annually as bonds amortize, at which point they can back additional bonds or be used to fund pledged or non-pledged federal direct loans. The agency's DWSRF LIST fund balance currently totals $23 million, or about 14% of outstanding bonds. The LIST fund balance is declining as bonds supported by it amortize or are redeemed and as new bonds are issued under the cash flow/hybrid model.
CROSS-INVESTMENT PROVIDES ADDITIONAL SUPPORT
As additional security the agency can invest its CWSRF or DWSRF reserves in either pool should any of the borrowers default. This mechanism is permitted under the 2004 cross-investment agreement as long as there are no defaults in the pool that is providing the support. It is important to note that while the ability to cross-invest exists, the agency is not legally obligated to use this feature. Because of this, Fitch does not combine the CWSRF and DWSRF in its cash flow modeling as it does with other SRFs that are legally cross-collateralized.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
RICWFA maintains a formal underwriting process involving extensive review of pool participant eligibility and security. The agency requires all prospective borrowers to maintain a minimum of 1.25x DSC on loans and covenant to raise rates if DSC is not met. All projects must be listed on the Intended Use Plan Project Priority List (a requirement for CWSRF funding).
The DWSRF portfolio carries an interest rate of approximately three-quarters of the borrower's market rate. However, in the event of a borrower default, RICWFA is authorized to require all pool borrowers to pay higher interest rates up to the borrower's market rate, thereby creating a step-up provision, which provides additional bondholder security. To date, there have been no defaults on any borrower loans.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (April 28, 2014).
--'State Revolving Fund and Leveraged Municipal Loan Pool 2014 Peer Review' (Nov. 10, 2014).
Applicable Criteria and Related Research:
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool (2014 Peer Review)